Internal finance 2.1.1 Flashcards
What is internal finance?
Capital raised from within the business.
Name the types of internal finance
Owners capital
Retained profit
Sales of assets
Improved management of working capital
What are sources of finance?
Refers to where a business gets money from to fund their business activities. A business can gain finance from either internal or external sources.
Define owners capital.
When an entrepreneur invests their own money in a business e.g. from personal savings.
Owner’s capital is how much the owner has invested in the business. Owner’s capital shows the proportion of the business’ assets that are owned by the business owner rather than creditors.
What is a creditor?
Someone you owe money to.
What is a debtor?
People owe money to you.
What are advantages of owners capital?
- Do not have to repay.
- No interest charges.
- Owner(s) maintain control.
- Risking own savings can be motivational.
- Do not have to go through any lengthy application procedures.
What are disadvantages of owners capital?
- May only be limited amounts available.
- Threat to personal finances and family.
Define retained profits.
Profit that has been made by the business in previous years that is then reinvested back into the company.
What are advantages of retained profits?
- Avoids interest repayments.
- Does not dilute the business ownership.
What are disadvantages of retained profits?
Only an option if sufficient retained profit exists within the business. May cause shareholder dissatisfaction if this is at the expense of dividend payments. Reduces the security blanket of keeping retained profits for unforeseen situations or to take advantage of new opportunities.
For profits to build up to use in this way can take too long and good business opportunities missed
Define sales of assets.
Refers more to the sale of a long term or fixed assets. Fixed assets will stay in the business for more than a year e.g. machinery and vehicles. These assets can be sold in order to get an immediate injection of cash in to a business and thereby provide finance.
What are advantages of sales of assets?
- No interest charges or repayments.
- May be turning an obsolete asset into finance.
- Immediate lump sum cash injection.
What are disadvantages of sales of assets?
- May be expensive in the long run if need to lease the asset back.
- Loss of use of the asset and future value.
- It is only a one off option.
What is “Improved management of working capital”?
Existing capital is made to stretch further. This can be achieved through the business negotiating to pay its bills later (creditors) or work at getting cash from their customers quicker (debtors).
